Bank of Japan June Meeting: The Tug of War Between Dovish Rate Hike and End of QT

As the Bank of Japan’s June monetary policy meeting approaches, a rate hike is almost certain, but expectations of ending its quantitative tightening (QT) plan are prompting the market to reassess its policy stance. The combination of a rate hike with the cessation of QT may result in an overall dovish policy tone, intensifying downward pressure on the yen and reinforcing concerns that the central bank is lagging behind the curve.

According to Wind Trading Desk and Nomura’s latest report, a Bloomberg survey of analysts conducted from June 3rd to 8th shows 96% expect the Bank of Japan to raise rates at next week’s meeting, with the yen’s overnight index swap (OIS) market pricing in about a 95% chance of a hike. Nomura expects the policy rate to rise from 0.75% to 1.00%.

J.P. Morgan similarly expects a 25 basis point hike, but points out that the threshold for a hawkish statement is very high—if the interruption of QT is announced simultaneously, the meeting could still be interpreted as dovish despite the rate hike.

These expectations have already had a marked impact on the market. The Nikkei previously reported that the Bank of Japan will simultaneously raise rates and halt the reduction of sovereign bond purchases at its June meeting. The news caused the Japanese yield curve to flatten, the yen to weaken modestly—mainly in cross rates—with USD/JPY also retreating somewhat.

Rate Hike a Done Deal, Focus Shifts to Policy Guidance

Consensus on a June rate hike is so strong that the decision itself is no longer the main focus.

The real market focus is on the policy statement and the press conference’s guidance about future rate hikes. Notably, BOJ Governor Kazuo Ueda is hospitalized for a liver cyst infection and will miss the June meeting. Deputy Governor Ryozo Himino will chair the meeting, while Deputy Governor Shinichi Uchida will preside at the post-meeting press conference.

Nomura expects the BOJ to maintain the view in its statement that “real interest rates remain at a very low level,” and to reiterate forward guidance for ongoing monetary easing and continued rate hikes. Given persistent yen depreciation pressures and the 10-year breakeven inflation rate (BEI) holding above 2%, Nomura thinks the BOJ may further emphasize its commitment to price stability in the statement to shore up market confidence.

J.P. Morgan economist Ayako Fujita notes the press conference may discuss the potential for further rate hikes, but since the market already prices in more tightening, the bar for the BOJ to surprise hawkishly is higher. To deliver a genuine hawkish surprise, the BOJ would need to signal an accelerated tightening pace or move rates above the 2% neutral rate—something that remains only a marginal scenario for now.

Nomura also expects the BOJ will not offer specific guidance on the pace or terminal level of rate hikes, instead maintaining its usual language of “data-dependent, meeting-by-meeting judgment.” Bloomberg’s survey shows the median forecast for the policy rate at end-2026 is 1.25%, end-2027 is 1.50%, with the same 1.50% as the neutral rate—all little changed from April, indicating no broad expectation of faster rate hikes.

QT Path Diverges, Stopping Reductions Could Be Seen as Dovish Signal

On QT, there’s clear market divergence. According to Nomura, 44% of respondents expect the BOJ to end reductions in government bond purchases, 36% expect a slowdown in reductions, and about 20% expect the pace to continue or even accelerate.

Nomura rate strategists Mari Iwashita and Yuna Minegishi expect the BOJ will announce continuation of the present reduction plan until the end of fiscal 2026 (i.e., reducing holdings by 20 billion yen per quarter, lowering monthly purchases to 2.1 trillion yen), and then halt reductions from April 2027, keeping monthly purchases steady at 2.1 trillion yen. Nomura estimates that even with reductions stopping, due to maturities exceeding purchases, the BOJ’s bond holdings will still fall by about 45 trillion yen in fiscal 2027, with net monthly purchases remaining negative—thus ending QT doesn’t mean an expanding balance sheet.

J.P. Morgan’s Ayako Fujita argues it would be more reasonable, from a balance sheet normalization and government bond market supply-demand perspective, to slow reductions to 10 billion yen per quarter. She also notes BOJ’s recently published market participant feedback was mixed, but a slight majority favored continuing reductions. In this context, if the BOJ does stop reductions, it could be seen as a political compromise for fiscal expansion, raising questions about central bank independence.

Naka Matsuzawa also warns that stopping QT is dovish and could be viewed as the BOJ accommodating government bond supply-demand or even serving the government, triggering concerns about “lagging behind the curve,” steepening the yield curve and weakening the yen. He points out that as of end-May 2026, the BOJ will hold about 533 trillion yen in JGBs, about 45% of the market, leaving little justification for ending QT from a liquidity perspective.

“Behind the Curve” Risk Rises, Yen and Intervention Watch

Several institutions identify the risk of “lagging behind the curve” as a key concern for the upcoming meeting.

J.P. Morgan points out that Kazuo Ueda previously said, “When underlying inflation reaches 2%, policy rates will enter the neutral zone,” but actual policy implementation has diverged from this. Currently, the BOJ’s core inflation gauge (excluding fresh food and special factors) has risen to nearly 3%, and the market is increasingly convinced underlying inflation has hit 2%. Even after this rate hike, policy rates will only reach the BOJ’s own lower bound estimate of the neutral range (1.1% to 2.5%), with the central bank admitting this range may actually be lower due to past easing.

Naka Matsuzawa notes that if the yen weakens further and the yield curve steepens ahead of the meeting, the BOJ may turn more hawkish in the press conference and mention the pace or terminal point of rate hikes; at the same time, authorities may also consider renewed FX intervention.

Nomura also observes that there could be dissenting votes inside the policy board. Board member Naoki Tamura opposed halving the pace of reductions at the June 2025 meeting. Board member Toichiro Asada has been considered a reflationist; if he votes against a hike, this could pave the way for incoming board member Ayano Sato, replacing Junko Nakagawa on June 30, to adopt a more cautious stance.

Midterm Review for Post-2027 Plans Emerges as New Focus

Nomura notes that as QT policy becomes clearer, the market’s attention is shifting to arrangements for a midterm review after 2027. Minutes from the BOJ’s bond market group’s May 21–22 meeting show some believe the reduction should progress automatically toward preset goals, and that “there is no need for regular midterm reviews in the future.”

Nomura believes that if the BOJ decides to end reductions, it may simultaneously streamline or suspend its midterm review mechanism and shift to a more automated bond purchase plan. This would to some degree reduce the real impact of dissenting policy board votes on balance sheet policy in the future.

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